Did You Forget to File Form 8606 for Non-Deductible IRAs?

Form 8606 Instructions for Forgotten, Non-Deductible IRA Contributions

Form 8606
Credit: https://www.irs.gov/

Tax time is riddled with various IRS forms, all of them tagged with a numerical name that seems to have no correlation to the purpose it actually serves. It's easy enough to get confused. Form 8606 is the one you're supposed to file to report your basis in a non-deductible individual retirement account (IRA). But what happens if you forget to do so, or you don't even realize that you were supposed to?

Don't panic. It's not the end of the world.

You Can File the Form Late

Let's say you made five non-deductible IRA contributions in previous years and you failed to file Form 8606 in any of those years. You never deducted the contributions on your tax return. If you submit Form 8606 now for each of those years, it might satisfy the IRS without incurring a penalty. 

After all, this is straightened out, do you also need to file an amended 1040? Here's what the IRS has to say about it:

"Although Form 8606 is normally submitted with a timely-filed Form 1040, the IRS will process a late-filed Form 8606even one that is filed after the normal three-year statute of limitations for claiming a refund has expired. The Form 8606 can be submitted without a Form 1040 or a Form 1040X."

Let's take this scenario one step further and say that you're 66 years old and you've never taken a distribution. You file one Form 8606 for each year you made a non-deductible contribution.

This will establish your basis in the IRA. You would then be eligible to either convert your non-deductible IRAs into Roth IRAs, or you could begin taking distributions from the non-deductible IRAs. And no, you don't have to file an amended return.

Other Options

You have additional options for IRA contributions if you made them within the prior three years.

The IRS allows you to treat them as either deductible or non-deductible—it's your choice. If you want to claim the deductions, you would have to file an amended tax return using Form 1040X. You would have to do so for each year you want to go back and claim the deduction.

You can only do this within three years from the original filing deadline. So if you wanted to claim an IRA deduction for the tax year 2015, you would have to file the amended return by April 15, 2018, the last day to claim a tax refund for that tax year.

Consider working with a tax professional to help you figure out if doing this or converting to a Roth IRA would make the most financial sense for you at this point in time. 

The Penalty for Late Filing 

The penalty for filing Form 8606 late is $50, but the IRS sometimes waives this penalty if you can show reasonable cause for the delay in filing the form. 

Tax laws change periodically and the above information may not reflect the most recent changes. Please consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and it is not a substitute for tax advice.